The United States Congress worked overtime over the New Year’s Holiday to pass the American Taxpayer Relief Act of 2012 and was signed into law by President Obama. There are many provisions that are allowing members of the agricultural community to breathe a sigh of relief as they head into 2013.

The bill permanently retains the 10%, 15%, 25%, 28%, and 33% income tax brackets. The 35% tax bracket ends at $400,000 for single filers and $450,000 married filing jointly. Above this threshold, there’s a new 39.6% tax bracket. Likewise, the bill permanently retains the 0% and 15% tax rates on qualified dividends and long-term capital gains, and adds a new 20% tax rate that would apply to taxpayers who fall within the new 39.6% tax bracket. Which capital gains tax rate will apply depends on what tax bracket a person is in. The new capital gains tax rates for 2013 and future years will be:

0% applies to capital gains income if a person is in the 10% and 15% tax brackets; 15% applies to capital gains income if a person is in the 25%, 28%, 33%, or 35% tax brackets; 20% applies to capital gain income if a person is in the 39.6% tax bracket.

Estate tax

The federal estate tax legislation permanently maintains the federal exemption for gifts and estates estate tax exemption at $5 million instead of dropping to $1 million. This amount will also be indexed for inflation and includes the transfer of the unused exemption of a deceased spouse to the surviving spouse. It should be noted that this legislation included the word “permanent.” This is significant as many fiscal agreements made by Congress since 2001 have contained a phase out date. The top rate to tax amounts in excess has increased from 35% to 40%. But, for many, this was an acceptable compromise since it was scheduled to drop to $1 million with the excess taxed at 55% in 2013.

Section 179

Internal Revenue Code Section 179 allows farms and other businesses to write off small amounts of annual investments in capital assets, such as machinery, in the year of purchase in lieu of depreciating the investment over a number of years. The 179 deduction was reverted (increased) back to the old 2010/2011 level of $500,000 for 2012 and 2013. This is a huge incentive given that up until this legislation was passed, the 2012 limit was $139,000 and it would have dropped to $25,000 in 2013. Since this bill was not passed until the final hours, the increase to $500,000 for 2012 will most likely not help farmers unless they had purchased equipment in excess of $139,000 and had planned on just putting it on a regular deprecation schedule. It should be noted that this deduction will revert back to $25,000 beginning in 2014. However, as always, time will tell.

Bonus depreciation

This legislation also extended the special 50% special depreciation allowance, also known as bonus depreciation, through the end of 2013. The bonus depreciation provision generally enables businesses to deduct half the cost of qualifying property in the year it is placed in service. Bonus Depreciation is now scheduled to be eliminated for the 2014 tax year.

Payroll tax and conservation

In 2011, Congress had lowered the FICA payroll tax rate from 6.2% to 4.2% to put more money in the pockets of Americans. This adjustment expired at the end of 2012. This will result in a payroll tax increase for workers. For example, a farm employee earning $30,000 a year will take home $50 less per month. In addition, the special break for conservation easement donations was extended through 2013.

Federal health care tax

As part of the plan for funding the federal health care, several new taxes were put into place that this most recent bill did not address. These included a tax on investment income and an additional Medicare tax for those people earning higher incomes. Both of these new taxes impact individuals making more than $200,000 a year or couples with $250,000 or more. These taxpayers must pay the new 3.8% tax levied on investment income such as cash rent received for farmland starting in 2013. Additionally, these same high-earners must pay an additional .9% Medicare payroll tax on wages above $200,000 for individuals and $250,000 for couples. This increases the current 2.9% Medicare payroll tax to 3.8% for those dollars earned above the designated earning levels.

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Beginning in 2013, the employee share of the hospital insurance (HI), or Medicare, portion of the Federal Insurance Contributions Act (FICA) payroll tax will increase by 0.9% (from 1.45% to 2.35%) for high-wage earners. Will you be affected? The tax applies to the extent that your wages exceed $200,000 ($250,000 in combined wages if you’re married and file a joint federal income tax return, $125,000 if you’re married and file separately). So, in 2013, a single individual with wages of $230,000 will owe HI tax at a rate of 1.45% on the first $200,000 of wages, and HI tax at a rate of 2.35% on the remaining $30,000 of wages for the year.